Let the Market Check Beijing’s Ambitions

In the 21st century, China looks like it could buy the world. With over $3 trillion in foreign currency reserves, China is the largest foreign holder of U.S. debt. Its sovereign wealth fund owns minority stakes in prominent U.S. financial institutions such as Morgan Stanley and the Blackstone Group, and Chinese state-owned corporate behemoths span the globe, gobbling up assets and resources from Australia to Canada, from Southeast Asia to Latin America.

U.S. policymakers know well that Chinese foreign direct investment (FDI) brings jobs and other benefits to Americas weak economy, but many are alarmed by the influx of businesses that seem to respond to Beijings edicts more than they do to market forces. China's international bad behavior, such as aggressive cyber attacks against Western firms and government agencies, only magnifies the dangers of doing business with Chinas government-affiliated entities.

Nevertheless, U.S. policymakers should not mistake the national security threats that China poses for the economic omnipotence of Chinese firms. In a world of intense global competition, and frequent hyperventilation about America's impending decline, avoiding an inclination to overestimate or panic over the prowess of Chinas state-funded endeavors may be difficult, but would also be sensible.

Just because China is not hesitant to harness market forces to serve its authoritarian objectives does not mean the market will play along. If the road to hell can be paved with good intentions, then the path of unintended consequences could certainly be designed by Chinas state directives.

In the past decade, the international reach of Chinas economic and financial might has been on broad display. Beijing has invested heavily in U.S. dollar-denominated assets, and as of January 2013, it held $1.26 trillion in U.S. Treasury securities, more than any other foreign country. China's outward direct investment has grown dramatically as well. According to the Rhodium Group, a New York-based consulting firm, Chinese companies, whose investments in the United States were negligible throughout the 1980s and 1990s, closed deals here totaling $6.5 billion for the year 2012, and are expected to send more than $1 trillion of investment capital out of China by 2020.

The onslaught of Chinese investment appears real enough when private Chinese companies snatch up Western name brands such as IBM ThinkPad, Volvo, and AMC Theatres, but Chinas state-owned enterprises (SOEs) are the ones that have been making the headline-grabbing mega-purchases around the world. According to the Heritage Foundation's China Global Investment Tracker, a database of large overseas Chinese investments and engineering and construction contracts, SOEs accounted for 96 percent of the transaction value of Chinese investments from 2005 to June 2012.

None of this is surprising. Chinas largest SOEs benefit from a wide range of government preferences, including preferred access to bank capital, heavy tax subsidies, and cash injections in times of financial trouble. They also have been encouraged by Beijing since the dawn of this century to go out into the world, win market share, and, among other things, secure natural resources for the countrys explosive economic development.

Washington has viewed Chinese government-funded or affiliated transactions with everything ranging from suspicion to hostility. Given China's keen interest in economic espionage and cyber attacks, Washington has repeatedly said no to proposed Chinese acquisitions on national security grounds. The Committee on Foreign Investment in the United States (CFIUS), an interagency government committee, formally reviews foreign transactions that pose potential national security risks, but Congress regularly ratchets up the political pressure. Most notably, in 2005, Congress vehemently and successfully opposed a high-profile bid by CNOOC to acquire U.S. energy company Unocal for fear that America's oil supply would fall into Beijings hands.

Numerous other examples of U.S. opposition to Chinese acquisitions abound. Just this past September, the Obama administration blocked a private Chinese company from building wind farms in Oregon, citing the project's proximity to a U.S. Navy base. Between August of last year and January 2013, members of Congress, most notably Senators Chuck Grassley (R-IA) and John Thune (R-SD), repeatedly raised concerns about the (now approved) sale of electric car battery maker A123, a recipient of over $100 million of stimulus funding, to China-based Wanxiang Group Corp., arguing that taxpayer-funded technology could be shipped off to China and its military applications reproduced.